Tuesday, 3 August 2010

Confidentiality clause anticompetitive

It seems like a slightly odd collision of legal principles, and surely one that should never have been allowed by the parties to happen - Jones v Ricoh UK Ltd [2010] EWHC 1743 (Ch) (14 July 2010) concerns the use of a clause protecting confidential information to try to prevent the other party to the agreement from tendering for business. It goes to show that care has to be taken when drafting confidentiality agreements, just like with restrictive covenants (as in my earlier posting on the Pirtek case), because it can only go as far as necessary to protect the confidential information. In the Pirtek case the Competition Act 1998 was invoked against the no-competition clause: in the Ricoh case Article 101 of the Treaty on the Functioning of the European Union applied - the same principle, but an effect on trade between Member States was present because Mr Jones sought to apply the clause to business dealings in Germany and Sweden, and in a later transaction throughout the EU.
The clause, in a letter agreement initially drafted by Mr Jones's company's then solicitors, read:
“no approach or contact direct or indirect in connection with or during our discussions or whilst any Confidential Information remains in the possession or under the control of any Relevant Person [and connected company] shall be initiated, accepted or made by or on behalf of any Relevant Person to or with any employee, client or supplier of yours or any government body or regulatory or other authority or to or with any other person who to our knowledge has any actual prospective connection with you without your prior written consent.”
The letter in which this clause appeared also contained two important definitions - important, because of their breadth:
For the purpose of this letter “Confidential Information” means documents and information of whatever nature and in whatever form relating to [CMP] or its businesses, business practices, finances, affairs, dealings, clients, suppliers, agents or employees disclosed or otherwise received by any Relevant Person whether before or after the date of this letter directly or indirectly by or from [CMP] or any of its employees, agents or professional advisers but excluding information which at the time of being disclosed or received is within the public domain or which comes into the public domain otherwise than as a result of a breach of the undertakings or other obligations set out or referred to in this letter.

“Relevant Person” means and includes each of us and any company which is or which is associated with:

(i) Ricoh (U.K.) Limited and in each case any of their employees, agents or professional advisors.

So, as long as any confidential information remained in Ricoh's possession, it would be in breach of contract if any of its group companies made or accepted any approach to or from or any contact with any client of Mr Jones's company, CMP, any government body or regulatory or other authority or any other person to Ricoh’s knowledge “has any actual prospective connection” with CMP. Ricoh tendered for work that Mr Jones's company (in liquidation by the time of the action, the cause of action having been assigned to him) had formerly had, prior to the takeover of the client concerned. He contended that this was in breach of the obligations contained in that confidentiality clause, and indeed on the face of it that seems incontestable. But Ricoh argued that it was caught by the prohibition in Article 101, because of its unlimited geographical and temporal scope and the fact that it applied to dealings by any Ricoh group company - of which there were 150.
Because the clause effectively prevented any of those 150 companies competing with CMP as long as the defendant (or another Relevant Person, widely defined) held Confidential Information (very widely defined) it went beyond what was needed to protect confidences: its object was to restrict competition. It also meant that Ricoh - one of the largest companies in the field - would be precluded from doing business with many customers, thus insulating other companies in the field from competition.
Such restrictions can sometimes work (though it is odd to find them in confidentiality agreements): if they are found in vertical agreements, they could benefit from a block exemption. However, the Court found that the parties were not vertically disposed in relation to one another (they were not manufacturer and distributor) but operated at the same level in the distribution chain, and the block exemption did not save the arrangement. Nor was there any mileage in arguing that Article 101 was not prohibited insofar as it applied to extra-EU deals: the claim related to invitations to tender that included EU countries - although in a case in which there was no inter-Member State trade Article 101 might well not apply.

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